Prop. 87 fuels high octane fight on oil production tax

In August 2006, the average price of gasoline in California was $3.20 per gallon. Today, with the summer demand faded, it still hovers at $2.60. Politicians and interest groups know that Californians want answers and solutions, and they also know that the election season is upon them.

Next month, California voters will take sides in what has been an epic battle over Proposition 87, called the Clean Energy Alternative Act.

The stakes include a proposed $4 billion state tax on oil production, which would be spent on development of alternative fuels and theoretically change the amount of oil California needs to import from the Middle East, especially for gasoline. California is the fourth-largest oil producing state in the United States and the No. 1 gasoline consumer.

On one side, Hollywood producer and prominent Jewish Democrat Steven Bing is backing the initiative. Against him stand the nation's largest oil corporations. Weeks before Election Day, Proposition 87 is already at the center of a $105 million spending spree by partisans on both sides, breaking the record for any single initiative on a California ballot. Bing alone donated approximately $40 million.

On the other side are the oil companies, which claim the measure would force them to fund an unaccountable state handout.

The fundamental idea behind Proposition 87 is that corporations extracting oil from California lands would have to pay a new tax into a state account, called the California Energy Independence Fund. The complicated tax would vary, depending on the market price of a barrel of oil, but the most likely interpretation puts the new fee on a $70 barrel of California oil at about $2.17. Once $4 billion in taxes is collected this way, or after 10 years at the latest, the levy would cease to exist.

More than half of the anticipated $4 billion would be used to subsidize public vehicles, such as school buses and garbage trucks that run on alternative fuels, and to fund private research institutions to develop and manufacture new fuel sources. More than a quarter of the money would go to universities for work on renewable energy sources and to community colleges for vocational training in the field. The rest would fund alternative energy start-up companies and public education programs.

One major goal is a 25 percent reduction in petroleum use for transportation in the state over the next 10 years, but in general, the California Energy Alternatives Program Authority, which Proposition 87 would create, would have a great deal of discretion on spending. The measure contains numerous examples of the type of programs that could qualify for funding.

However, there are far fewer strict guidelines for what would be excluded. This is where the greatest problem with the measure lies, said Scott McDonald of the "No on 87" campaign.
"They have specifically excluded themselves from the state's contracting and bidding regulations," he said.

The law allows employees of grantee organizations to be members on the authority board, raising the potential for conflicts of interest.

"There are no specifics in the initiative," McDonald told The Journal. "There's no requirement that [the tax money] will be spent in California or the United States, for that matter."
Beth Willon of the "Yes on 87" campaign responded that despite critics' doubts, "none of the members of the [authority's] board can make any money from this." Despite the looseness of membership requirements of the authority under the law, she said, members of the authority and any entities that they control cannot directly receive funds from it.

Another concern of critics is how the tax could affect the behavior of oil companies. Though the law and the global economics of oil would prevent them from directly passing the cost of the tax onto Californians in gas price increases, they may opt to import more expensive foreign oil if the tax makes "marginal wells" in California even less profitable to drill, McDonald said.

The "Yes on 87" campaign has attacked all those claims, most recently with a TV ad featuring former Vice President Al Gore arguing that the fruits of the alternative fuel research funded by Proposition 87 will mean less dependence on foreign oil. In terms of marginally profitable wells, Proposition 87 seems to have foreseen the problem by enabling oil companies to deduct the new tax from their general corporate income taxes.

Latching onto the income tax concession like a sign of weakness, the "No on 87" campaign has in recent advertisements argued that withheld corporate income taxes would reduce available General Fund revenue for the state to spend on schools. The proposed tax deduction counters the prediction that the initiative would increase foreign oil imports due to lost oil profits, and with a potential impact of at most $14 million, it is not likely to impact the education budget, which for 2005-06 stood at $58 billion.

Advocates for the measure include high-profile Democratic Party supporters, such as former President Bill Clinton, Gore, California Sen. Dianne Feinstein and L.A. Mayor Antonio Villaraigosa, as well as the L.A. City Council by a 10-1 vote. The local Progressive Jewish Alliance also supports Proposition 87 and has issued a position statement arguing that even if the tax increases the cost of gasoline in the short run, the higher cost would only encourage more California consumer adoption of alternative fuels.

Proposition 87, however, aspires to affect the international oil market, so a look at California state politics is not the end of the story. Gal Luft is co-director of the Institute for the Analysis of Global Security, but he spoke to The Journal on his own behalf as an energy expert. Luft said the real question is whether Proposition 87 can actually accomplish its objectives, given the economics of oil and what its cost would be on a global scale.

"I think the goal of a 25 percent reduction in [petroleum] consumption in California within 10 years is completely unachievable," Luft told The Journal. "There's no way, period."
Luft scoffed at the billions of dollars allocated in Proposition 87 for research into alternative fuels.
"We have the technology today to move beyond oil. You need a deployment of existing technologies," Luft said.

Even some of the more practical portions of Proposition 87 don't go far enough for Luft. Though the measure would subsidize retrofitting public agency vehicles to run on an ethanol-gas fuel mixture, Luft said that it is aiming to fix the wrong problem.

"Their proposition does not have a clear idea of where the [ethanol] fuel will come from," he argued.

Luft worries that a research-heavy approach like Proposition 87 would focus on experimental "cellulosic" ethanol from biomass, rather than more tried-and-tested solutions.

Luft said the first real barrier to alternative fuel use in California is the federal tariff on imported sugarcane ethanol from Brazil, not a lack of technology, research or vehicles. The federal government's protectionism on behalf of Midwestern corn-growing ethanol producers forces California to truck the ethanol into the state inefficiently, instead of shipping from South America. Since California lawmakers can do nothing to affect those federal tariffs, Luft saw Proposition 87 as an expensive diversion.

"The winners of all this will be universities [and] research institutions," Luft said. "That's nice, but I don't want people to think if they pass Proposition 87 that California oil use will dramatically decline."

Luft also doubts that the broad focus of Proposition 87 on wind, solar and other power-generating technologies will at all displace oil use, because the United States uses petroleum for only 3 percent of its electrical generation. To reduce oil use in the short term, Luft advocated simple policies: government incentives to work at home; incentives for ethanol-providing gas stations, which are included in Proposition 87, and more mass transit.

"Yes on 87" advocate Willon responded that oil can be displaced in new ways, pointing to a Torrance FedEx facility that uses solar power to recharge its fuel-cell powered trucks.

Luft's final point was geopolitical.

"All these [Western] companies, Exxon and Chevron and BP and Shell, all of them together are about 8 percent to 9 percent of the world's oil market," he noted.

If Proposition 87 does weaken U.S. oil companies like Exxon Mobil, said Luft, that plays into the hands of the state-owned giants like Saudi Aramco.

In 2006, all parties are talking about the lofty goal of alternative energy sources. But Proposition 87 poses far deeper questions, asking voters to gauge their trust in government subsidies and bureaucratically funded research, to decide where they believe technological change should come from and to weigh those considerations against their opinions of multinational oil companies and the federal government.
One thing is for sure: Battles on this issue are just beginning, no matter what happens on Nov. 7.

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